The pace at which venture capitalists are deploying funding across the globe slowed yet again in April.
Venture capital dollar volume, as tracked by Crunchbase News in a new report, peaked in November 2021. Since that apogee, the value of venture investments has ticked lower in most months before dropping another $5 billion from March to April.
The Exchange explores startups, markets and money.
Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.
That the venture capital industry is pulling back should not be a surprise. TechCrunch covered falling startup valuations at most stages earlier this week, for example. Many companies that saw a pandemic boom are now enduring a return to Earth, further harming investor demand for previously hot categories, and some recent IPOs in tech sectors that have ample startup activity are suffering from sharp selloffs.
The data matters, however, not simply because it confirms our expectations of where venture activity is heading in 2022 — it also indicates that the change in the venture capital market will prove gradual to some degree, helping explain why Q1 2022 VC data was stronger than some anticipated. Because the slowdown in VC investments won’t be a single thunderclap, we expected to see more damage arrive in Q2 than we saw in Q1, and the Crunchbase News dataset underscores the perspective.
This morning, we’re parsing the latest numbers to better grok market sentiment around the current venture capital market. Which, as you will shortly see, is far smaller than it was just a few months ago.
A mixed but meaningful dip
Despite the 12-month low, we aren’t witnessing a dramatic dip. According to Crunchbase, the amount invested in private companies last month is only 10% lower than in March of this year. The year-on-year decline isn’t massive either, with April 2022’s tally only 13% inferior to April 2021’s.
The decline is also nuanced when looking at different investment stages. Seed funding actually increased by 14% year on year. But late-stage funding is down 19% year on year. Even though it was flat month on month, we think it is the latter figure that matters the most.
Why is it more important that late-stage funding declined? Partly because we know that corrections tend to drip down from later stages to earlier ones over time. But also because the trend is corroborated by what’s going on with early-stage funding. This stage of funding not only declined month on month — it was flat year on year.
We’re not the only ones who think that the seed stage is an outlier here. FirstMark partner Matt Turck commented on Twitter that ”only seed and crypto remain vibrant (or delusional?)” (It’s worth noting at this juncture that crypto investing appears to be the brightest spot in the current venture capital market, per commentary and sheer deal volume that we have noticed in recent weeks.)
If it’s delusion that’s kept seed funding afloat, it won’t take long before seed investors start thinking twice about deploying capital. But even if the slowdown never reaches the seed stage, it still affects the bulk of funding. With this in mind, we expect it to dramatically impact Q2 numbers across the board and around the world.
What’s next?
To say that the macroeconomic picture today is troubled would be an understatement. A few notes on the present day for context may be useful. Currently, there’s an energy crisis in Europe as the EU deals with Russian military aggression and the critical work of decoupling its energy needs from a hostile foreign power. Russia appears closer to Middle Eastern governments than before, loosely adding to a rising autocratic consensus across the Middle East, Europe and Asia, where monarchies, populist governments and China’s central ruling class are making economic decisions of varying levels of reasonableness.
Such forms of government don’t lead to the best economic results, and damage is starting to add up. China, to pick an example, is holding to its zero-COVID strategy, to the detriment of its economy and the larger global supply chain. This decision appears to come from the top. Turkey is cutting interest rates to combat inflation, another top-down dictate that makes as much sense as scissors made of pudding. Russia, of course, is in the grips of an autocrat who decided to invade Ukraine under false pretenses and has thus mired his nation in malaise after the world enacted stiff sanctions against the country’s government and ruling economic elites.
There are other issues. Inflation is too high in many countries, leading to central-bank rate tightening. This is crimping consumer wallets and raising borrowing costs. Corporations are struggling in a tight labor market as well, not helping their near-term margins. Companies are also seeing their capital costs rise as rates change.
Throw in a jittery commodities market and oil prices generally higher than most would appreciate, and it’s a big bucket of suck out there.
This means the cooling venture climate doesn’t appear ready to snap back, and that’s if the Russian invasion of Ukraine doesn’t spiral into new areas, and China doesn’t decide that it’s the right time to try to force Taiwan under its governing umbrella by force.
The phrases new, normal and new normal have been much abused during the COVID era. So let’s avoid them and simply say that it’s clear that today we are in a venture capital market much changed. And just as the factors that led to the 2021 boom in dollars invested in private companies felt durable at the time, so too does the present cluster of issues.
Comment